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Although the law (Article 25) emphasises the independence of the central bank, particularly from fiscal policy requirements, it does allow scope for the budget law to force the central bank to finance the federal deficit (Article 26). Thus, in one important regard, monetary policy is subordinate to fiscal policy.
The provisions apply to all financial institutions with the exception of the Sberbank. The revision of the banking law became necessary following the passing of the central bank law and the Civil Code in order to harmonise the regulations.
The Russian bank law does not make explicit reference to the universal-bank character of the financial institutions.
Given the extremely short period maturity of loans, the annual real interest rates are calculated by first converting the annual (nominal) interest rates to a monthly basis and then comparing them with the monthly rates of inflation. The resulting monthly real interest rate is then compounded to yield the annual real interest rate.
Previously, the central bank put the share of loans classified as non-performing at more than 30% of the total.
Cf. Central Bank of Russia, Bulletin of Banking Statistics, no. 8/1996.
The central bank law and the law on banks and the commercial activity of banks were passed in 1991. An amended version of the central bank law is expected to come into force during 1997. The law on banks and the commercial activity of banks has continually been supplemented by additional regulations.
The table is based on data published by the Ukrainian Banking Federation. The Federation only uses data made available to it voluntarily by the banks themselves, however. Many banks, especially the relatively large ones, publish annual accounts verified by external accountants and are attempting to move towards western accounting conventions, as it is only then that they get access to loans by western banks. It must be doubted, however, whether these verifications always, meet western standards.
In the course of the economic reforms since 1994, the scope for legal commercial activity has been extended and the higher tax rates on banks, compared with industrial and trade enterprises, that applied in 1993 and 1994 were removed. Banks are, however, subject to an implicit additional taxation in the form of the high minimum reserve requirements. The average minimum reserve requirement for deposits was around 15% until the beginning of 1997 when it was reduced to about 11%.
Such behaviour is facilitated by the difficulty for creditors in obtaining access to debtors' assets.
Government bonds are auctioned several times per month at widely varying volumes and with maturities of between 3 and 12 months. Initially foreigners were de facto excluded from purchasing such bonds. Since mid-1996 they have been admitted, although only through the mediation of a Ukrainian correspondent bank. There have been substantial fluctuations in nominal effective interest rates. In the first half of 1996 the rates varied between 80% and 180%, falling, alongside the decline in inflation, to between 53% and 97% in the third quarter and around 65% in the fourth quarter. The rate of inflation in 1996 was 39.7%, so the average real rate of interest is very high. Given the freedom of capital movements for foreign investment and for the repatriation of earnings and the virtually constant nominal exchange rate of the US dollar, this high rate of interest also applies to foreigners. The situation regarding the taxation of earnings remains unclear, however: according to the law, interest earnings and capital gains are subject to a 10% withholding tax, although in practice this has frequently not been withheld. The conditions of participation in transactions on the secondary market as well as the respective taxation also remain uncertain, a factor that has hindered the development of this market.
In view of the numerous historical experiences with this problem, it was proposed back in the 1980s that, in addition to strict supervision of the banks in an attempt to limit the inherent risks of banking, the instrument of setting a ceiling on interest rates should also be considered. However, such an intervention in the allocation of capital also has disadvantages, the impact of which are hard to predict, so this instrument has not been deployed to date in eastern Europe. Instead, particularly in eastern central Europe, government support for banks affected by such problems has generally been provided.
In addition to the high risk of default, the size of this differential is also due to the costs resulting from the high minimum reserve requirement.
The degree of monetisation is defined as the relationship between the money supply and GDP.
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Schrooten, M., Thießen, U. Russia and the Ukraine: the state of the banking sector remains precarious. Economic Bulletin 34, 9–18 (1997). https://doi.org/10.1007/s10160-997-0023-z
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DOI: https://doi.org/10.1007/s10160-997-0023-z